Lately, I can’t help but shovel more money into government bonds. With yields of 3-month to 1-year government bonds of 5% or more, the guaranteed return is too high to overlook.
However, I suspect that the more bonds I buy, the more I will regret this decision in a year from now. Perhaps you are starting to wonder the same.
During the global financial crisis of 2008, I bought a 5-year CD with a yield of 4.5%. I also thought these were great rates, especially since the stock market was crashing at the time. However, investing in the S&P 500 was a much better investment.
My instincts tell me I won’t regret buying Treasuries today.
For background, I have been investing for over 27 years, worked in finance for 13 years and retired in 2012. He started Financial Samurai in 2009 and has written over 2,500 articles.
The risk of buying risk-free government bonds today
First, let’s look at the downsides of buying US Treasuries with a guaranteed return of 5% or more. You can buy government bonds from Treasury Direct or any online brokerage.
![government debt](https://i2.wp.com/financialsamurai.com/wp-content/uploads/2023/02/bond-table.png?fit=1456,9999)
1) Reduced liquidity
To get a guaranteed bond return, you have to hold the bond to maturity. Otherwise, if the rate stays the same or increases, you will have to sell at a discounted price. Discounts ultimately translate into having to pay more for the items you’re trying to buy.
Most online brokerage accounts automatically offer higher cash yields on uninvested cash. For example, Fidelity offers 4.11%.
2) Missing out on potentially high returns
The money used to buy government bonds could have been invested in other, better performing investments. A 5% guaranteed return sounds good, but he’s 5% below the S&P 500’s historical annual returns.
Besides using your money to invest in stocks, real estate, venture capital, and other private investments, you can also invest in your own business. Once things start to work well, private business returns are often much greater.
If you haven’t already made the right net worth asset allocation to your risky assets, you may regret buying government bonds even with their current high yields.
3) have to pay taxes
If you invest in government bonds, you will receive a 1099-INT form from the Treasury Department. You must pay the marginal federal income tax rate on your income. Thankfully, you don’t have to pay state or local taxes on your income.
If you buy government bonds at a discount and sell them at a premium, the gain is taxed as a capital gain. Therefore, the higher the ordinary income, the higher the tax rate on government bonds.
![2023 LT ST Capital Gains Tax Rate Single](https://i2.wp.com/financialsamurai.com/wp-content/uploads/2023/02/2023-LT-ST-Capital-Gains-Tax-Rates-Singles.png?fit=1456,9999)
Why you won’t regret buying government bonds with a yield of 5% or more
Now that I’ve described the major downsides to buying Treasury bonds, let me explain why I’m happy with increasing them. Perhaps some of the reasons also help support your reason.
1) 5% return is higher than our safe withdrawal rate
Our safe withdrawal rate is currently 0%. 0% because I can live 100% on my online income. All investment returns are 100% reinvested. If you work, your safe withdrawal rate is also 0%!
As a retiree with no online income, a safe withdrawal rate of 2% to 3% would be enough to cover all your desired living expenses. So a return of about 3%-4% after tax is enough for him to buy a year’s worth of living expenses.
2) There is no high-priced item I want to buy
I still have dreams of buying a better home, but realistically, I don’t plan on buying another after my current one in 2020.
Also, I have no plans to buy a new car for at least the next three years. When the time comes, you may lease a new car for the company’s expense. Our current car he has 40,500 miles on it and I hope it’s still many years before it becomes a money pit.
Finally, we superfunded both children’s 529 plans and gave some more money. All other expenses can be comfortably covered by investment income or online income.
3) I am happy with what I have
Another way to say that there is nothing big that we want to buy is that we are happy with what we have.
We don’t want flashy clothes, jewelry and watches. My watch collecting and trading days are over.
Our children are still too young to enjoy or remember travel, so we won’t be able to take an international luxury vacation for the next five years.
Nor are there any reckless addictions such as gambling, drugs, alcohol, or other vices that can set us back. We see a lot of high stakes poker online these days, and some players lose big bucks very quickly!
This is a killer poker hand that shows how one man lost a million dollars of real money. The winner wins the biggest pot in live poker history, but in the end he only wins $150,000 in one day.
4) Government bonds provide freedom for most mortgage holders
Over 80% of existing mortgages have interest rates of less than 5%.
A 5% return pays a primary mortgage rate of 2.125% plus some interest. Whenever you can get a risk-free rate of return higher than your mortgage rate, you should make the most of it.
Psychologically, every time I buy another bond, it feels like I’m living for free. Considering I’m still paying my mortgage each month, it feels like I’m winning a double-win by paying back the principal and living for free.
We are finally paying off our mortgage. When the time comes, we will look back and be amazed at how cheap it was to own a home. You can also acquire valuable assets that you can sell or provide rent-free living.
![Mortgage by interest rate](https://i2.wp.com/financialsamurai.com/wp-content/uploads/2022/09/mortgages-by-interest-rate.png?fit=1456,9999)
5) I am in division mode
Earnings above 0% are added to our net worth. However, in 2022, at age 45, I am determined to enter weight loss mode. We don’t want to hit our net worth target for our age and pay a 40% death tax rate on our remaining wealth.
Therefore, I don’t think you need to take too much risk to get a return greater than the risk-free rate. In fact, after years of earning less than 1% despite inflation, he feels blessed to be able to give back 5% of his money without risk.
Earning less than 1% in cash felt terrible. But it’s incredible that in cash he earns over 5%. It is difficult to use investment income as it is.
6) Since 2020 we have experienced enough stress and anxiety
Life wouldn’t have been so difficult if we didn’t have young children during the pandemic. felt.
The pandemic was more tolerable in 2020 and 2021 when the value of risk assets was rising. But then the stink of 2022 will make him lose all his gains for 2021. Thankfully, life returned to normal by late 2022.
I’m happy to take the stress out of investing next year because I’m mentally recovering. We already have a lot of risk asset exposure due to our existing investments. Therefore, we believe that there is no need to increase exposure.
It feels great to know that the money we save will be 5% more a year from now. I didn’t feel good working for free in 2022 (no net worth growth).
7) 5% Treasury yields won’t last forever
Once the Fed completes rate hikes by mid-2023, the clock will begin to tick as to when the Fed will resume rate cuts. By mid-2024, the Fed will start cutting rates again. When that happens, interest rates on Treasury Bills (within a year) will begin to fall.
So my strategy is to buy as many 1-year Treasuries as possible in the month when I think the Fed will start cutting rates. This way you lock in the highest risk-free returns for the longest period of time.
Buying Treasuries when yields are at their highest level since 2007 seems like a good bet to me. Lower yields increase the value of existing bonds.
![Historical 1-Year Treasury Yield Chart](https://i2.wp.com/financialsamurai.com/wp-content/uploads/2023/02/one-year-treasury.png?fit=1456,9999)
8) Less burden on what to do with surplus cash
If you spend less than you earn, you accumulate excess cash. If you accumulate too much excess cash, it will start to create holes in your pockets. The growing burden can be uncomfortable.
Storing your surplus funds in short-term Treasury bills not only relieves discomfort, but also provides a modest return. With one less thing to worry about, he can spend more time doing other, more enjoyable things.
Thankfully, online brokerage money market rates are also rising, so idle cash automatically pays off.
9) Government bonds could well outperform equities and real estate
The final reason I don’t regret buying government bonds is that they may outperform equities, real estate and other risky assets over the next 12 months. you never know!
Not only do rising interest rates put your investment at a disadvantage, but you also want to profit from rising interest rates.
Owning government bonds gives you peace of mind
Imagine you had $20 million. 5% risk-free return guarantees $1 million in earnings. don’t you take it all day? I would.
Most of us know that we can’t afford to invest $20 million. It’s a good thought exercise to consider when deciding where to invest.
If I have a strong sense that the S&P 500 or real estate will rise by more than 10% from here, I will reduce my Treasury purchases. However, it is unlikely that the S&P 500 will top 4,200 in 2023.
So I don’t mind getting a 5% gain while we weather slowing earnings, more Fed rate hikes, and a potential recession.
If risk assets take off, that’s great. My existing portfolio will benefit, Treasuries continue to deliver 5% returns. If risk assets fall again, government bonds will at least outperform.
If the S&P 500 falls below 3,900 again, buy more shares. And every time I see his 10% or more adjustment in a public or private real estate deal that fits my portfolio, I buy.
In the meantime, most of my cash goes into government bonds and my capital is needed for my various private investments.
Reader Questions and Suggestions
What do you think are the other downsides to buying 5% yielding government bonds? Do you think you will regret buying government bonds in the future? If so, why?
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